Coverage Ratio Calculator

What is a Coverage Ratio?

A coverage ratio is a financial metric used to measure a company's ability to meet its financial obligations, particularly its debt and interest payments. It compares the company's income or cash flow to its debt obligations. A higher coverage ratio indicates better financial health, as it suggests the company can more easily service its debt.

The Coverage Ratio Formula

The general formula for a coverage ratio is:

\[\text{Coverage Ratio} = \frac{\text{Income or Cash Flow}}{\text{Debt Obligations}}\]

In our specific calculator, we use:

\[\text{Coverage Ratio} = \frac{\text{Gross Profit}}{\text{Annual Interest & Service Charge}}\]

Where:

• Gross Profit is the company's total revenue minus the cost of goods sold
• Annual Interest & Service Charge represents the company's debt obligations for the year

Step-by-Step Coverage Ratio Calculation

1. Determine the company's Gross Profit for the period.
2. Calculate the total Annual Interest & Service Charge for the same period.
3. Divide the Gross Profit by the Annual Interest & Service Charge.
4. The result is the Coverage Ratio.

Example Calculation

Let's calculate the coverage ratio for a company with a Gross Profit of $500,000 and Annual Interest & Service Charges of $100,000:

1. Gross Profit = $500,000
2. Annual Interest & Service Charge = $100,000
3. Coverage Ratio = $500,000 / $100,000 = 5

This means the company's gross profit is 5 times its annual debt obligations, indicating strong financial health.

Visual Representation

In this diagram, the green bar represents the coverage ratio of 5.0. The red line marks the breakeven point (1.0). A ratio extending well beyond this line, as shown here, indicates strong financial health.